Consumer Credit Protections for the Military

Congress has recently passed, as part of a much larger military bill, certain limitations on consumer credit extended to servicemembers and their dependents. This will ultimately be codified in Title 10 U.S. Code. In the meantime, I have attached a copy of just Section 670 of Public Law 109-364. Section 670 of Public Law 109-364

This statute is incredibly expansive. The cap on interest rates at 36% got all the press, and that doesn’t sound all that great — unless you have actually looked at a TILA disclosure that puts the interest rate, right there in black and white, at 1000%. There is way more to this Statute.

First of all, it doesn’t just apply to servicemembers, but also to their dependents. Second, it prohibits arbitration clauses, rollover/renewal based financing, and the use of post-dated checks, payments by electronic debit or the use of car titles as security for non-purchase money loans. This Act goes into effect October 1, 2007.

The Act also empowers those experts in consumer credit, the Department of Defense, to promulgate regulations to carry out this section. Those regulations are to establish the disclosures necessary, methods for calculating interest, allowable fees, definitions of creditor and consumer credit, and other things the Secretary of Defense deems necessary.

The Department has issued a draft of its proposed regulations which are now available for comment. DoD Proposed Regulation (actual proposed regulations begin at page 48 of the attachment.)

These regulations go a long way towards addressing the credit industry’s concerns about this Act. For instance, DoD limits the expansive definition of “consumer credit” in the statute to a very restrictive, payday loan description. The regulations require that the loan be:

Payday loans. Closed-end credit with a term of 91 days or less in which the amount financed does not exceed $2,000 and the covered borrower:

Receives funds from and incurs interest and/or is charged a fee by a credtor, and contemporaneously provides a check or other payment instrument to the creditor who agrees with the covered borrower not to deposit or present the check or payment instrument for more than one day, or;

Receives funds from and incurs interest and/or is charged a fee by a creditor, and contemporaneously authorizes the creditor to initiat a debit or debits to the covered borrower’s deposit account (by electronic fund transfer or remotely created check) after one or more days. This provision does not apply to any right of a depository institution under statute or common law to offset indebtedness against funds on deposit in the event of the covered borrower’s delinquency or default. . . .

This just doesn’t strike me as being that hard to wire around. Second, it expressly doesn’t provide protection for other types of incredibly usorious situations. Now, granted no one else is statutorily protected from some of the other kinds of loan products I have seen, but Congress has made the determination that the military and their dependents need special protection. I don’t think this is doing it.

One of the big concerns of the credit industry. is how to determine who is and is not a covered borrower? The introduction to the regs seems to indicate that the service member should be pretty easy to identify, because the lender will surely want proof of employment before making the loan. Have these people ever been inside a payday loan shop? I didn’t think so. Oh, and both the Statute and the Regulations define “dependent” as:

The member’s spouse, the member’s child defined in 38 USC 101(4), or an individual for whom the member provided more than one-half fo the individual’s support for 180 days immediately preceding an extension of consumer credit covered by this part.

So, a college student going to school in a State with no military bases could be covered. An elderly parent of a service member could be covered. The proposed regulations include a form that is to be offered to all applicants where the applicant must tell the loan shop whether or not they are a covered borrower, but the Statute does not provide a safe harbor for a creditor who relies on a statement from the borrower, and the penalty is voiding of the contract (or punishment for a midemeanor for a knowing violation).

There are some things here I really like. For one, the acknowledgement from Congress that maybe mandatory arbitration clauses and consumer contracts aren’t a good combination. Also, the inclusion of all fees and costs in the interest rate calculation. I am waiting, though, to see how the industry will react and what litigation, if any, results from this Act.